For many years, Taiwan has prospered as a vital link in the global supply chain. Its electronics companies, which account for 40 per cent of exports and 15 per cent of gross domestic product, have assembled phones, computers and other gadgets for successful western brands such as Apple.

More recently, they have done even better by expanding into China, both as a market and as a base for their factories — combining Taiwanese manufacturing efficiency with the mainland’s low labour costs.

Now that model is unravelling. Chinese demand is slowing along with the economy and Beijing is rapidly building up a domestic electronics industry, turning itself from a customer into a competitor. While this is a threat to all of Asia’s regional economies, Taiwan is uniquely exposed because of its dependence on the technology sector and the closeness of its cross-straits ties.

By contrast, Singapore, Malaysia and South Korea have more diversified economies that also produce cars, commodities, pharmaceuticals and consumer goods. The Koreans, in particular, have built up a number of internationally recognised corporate brands.

Taiwan is trying to respond. Tsai Ing-wen, its incoming president, has publicly declared a need to shift industry’s emphasis from efficiency to innovation.

This is a laudable aim, but it is easier said than done because it requires very different skills, both among managers and workers. It also runs the risk of alienating existing customers, who do not want their Taiwanese suppliers to compete with them by developing their own finished products and brands.

The takeover of Japan’s Sharp by Hon Hai Precision Industry, best known as the parent of Foxconn, will be a litmus test.

While the Taiwanese group sees this as an opportunity to gain advanced technology and go global, its big customers, led by Apple, might balk if Hon Hai tries to turn itself from component supplier to a producer of branded products in its own right.

Even if that does not happen, a transformation of Taiwan’s electronics industry will take time. Meanwhile, its ongoing weakness continues to hurt the economy.

Exports fell 12 per cent year-on-year in January and a further 7 per cent in February and the government recently downgraded its 2016 GDP growth forecast from 2.3 per cent to 1.5 per cent on the premise that exports would continue to fall all year. Domestic demand too is relatively sluggish, not helped by a housing market slump.

Policymakers are doing what they can. The government is planning to roll out plans to cultivate other export sectors, such as biomedical products and artificial intelligence, through preferential tax rates and deregulation. And the central bank is easing monetary policy while trying to keep the currency as competitive as possible.

After interest rate cuts of 12.5 basis points in both September and December 2015, the Central Bank of China, which only meets quarterly, cut again last week, taking the policy rate down to 1.5 per cent.

According to Medley Global Advisors, a macro research service owned by the Financial Times, it will keep lowering rates at every meeting this year unless export orders stabilise. Inflation, expected to average just 0.7 per cent this year, is not a concern — unless oil prices suddenly rocket.

Even a shock like that could be offset, at least partially, by steady intervention in the foreign exchange market, where the CBC is determined to keep the Taiwan dollar weak or, at a minimum, to see it strengthen more slowly than other local currencies and particularly the Korean won.

So far, that is a fight it is winning, with the Taiwan dollar up around 3 per cent against its US namesake this month compared with a 7 per cent rise for the won.

But while the central bank can keep macroeconomic policy broadly accommodative, the heavy lifting will have to be done by Taiwanese business and the transition to a future of greater innovation and higher margins will be neither easy nor swift.